Cambridge International as and a level Economics Ebook

Income eff ect: 
where following a price change, a consumer 
has higher real income and will purchase more of this product.
KEY TERMS
SELF-ASSESSMENT TASK 
7.2
1
Re-draw 
Figure 7.1a
 to show how it would change:
a 
if the price of B increased, leaving the price of 
A unchanged
b 
if the price of A decreased, leaving the price of 
B unchanged.
2
In your own words, describe the substitution and 
income eff ects of:
a 
an increase in the price of a normal good
b 
a decrease in the price of an inferior good.
Indiff erence curves – representing 
what consumers want
Th
e budget constraint referred to above showed what 
combination of goods a consumer could buy with given 
income and the prices of goods. Th
is is only part of the 
10
8
6
4
2
10
20
Product B
0
Pr
oduct A
20
30
Product B
0
A
Pr
oduct A
Figure 7.1 
(a) Budget lines for an income of $200 (b) Budget lines – a fall in the price of B
Quantity of A (US$20 each)
Quantity of B (US$10 each)
10
0
9
2
8
4
7
6
6
8
5
10
4
12
3
14
2
16
1
18
0
20
Table 7.2 
Combinations of A and B with a budget of $200
147
Chapter 7: The price system and the microeconomy 

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Figure 7.3 
The eff ect of an increase in income
Quantity of good A
Quantity of good B
0
E
2
E
1
I
1
I
2
B
2
B
1
Q
1B
Q
2B
Q
1A
Q
2A
reason why consumers buy particular goods – what is also 
relevant is consumer preference. Consumers will only buy 
a particular good if it is something that they actually want 
or prefer when having to choose between alternatives. 
Consumer preferences can be represented diagrammatically 
by what are known as